Trust beneficiary not presently entitled - Moignard

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03 Jun 14
Trust beneficiary not presently entitled - Moignard

The Administrative Appeals Tribunal has found that the Commissioner was incorrect in including in a taxpayer’s assessable income a sum representing the proceeds of a sale of property, as a share of the net income of a trust estate to which the taxpayer was deemed to be presently entitled. Rather, there was evidence that the sum, or a part of it, was properly assessable to the taxpayer in the relevant year of income in his capacity as trustee of a trust. This in turn meant that the Commissioner was incorrect to impose a penalty.

The taxpayer was a company director and trustee of a number of trusts. As trustee for a particular trust (HoCT/RST), which was described as a discretionary investment trust, the taxpayer exercised an option to purchase a commercial property and quickly sold it for a profit. The net proceeds of sale were deposited in two bank accounts, one being a newly-opened personal account in the taxpayer’s name and the other an account in the name of a corporate trustee of which the taxpayer was the sole director.

The Commissioner issued an amended assessment to the taxpayer including the net profit on the sale of the property in his assessable income, on the basis that the amount was the taxpayer’s share of the net income of a trust estate to which he was presently entitled, pursuant to s 97 and s 101 of the Income Tax Assessment Act 1936. The Commissioner also imposed an administrative penalty.

The taxpayer argued that there was no evidence to suggest that the proceeds from the settlement of the property were received by the taxpayer in his personal capacity. The fact that a bank account controlled by a trustee bears the name of a particular beneficiary of trust funds does not establish that the beneficiary is “presently entitled” to the trust funds. When loaned to other group entities, the funds were recorded in the books and records of those entities as trust funds of the trust. They bore no relation in quantum to the trust law income of the trust and thus could not be distributions.

The Commissioner argued that the taxpayer exercised his discretion as trustee of the HoCT/RST by directing or causing the net proceeds derived upon the settlement of the property to be deposited into his personal bank account and the bank account of a company controlled by him. Therefore, the taxpayer was deemed to be presently entitled to the income/profit derived on the sale of the property, pursuant to s 101 of the ITAA 1936. The Commissioner argued that the taxpayer could be deemed to be presently entitled to the sum if the trustee of the HoCT/RST paid or applied an amount to the taxpayer’s benefit, even if the trustee had not made a declaration, resolution or other act to distribute an amount to the applicant, provided that an amount had been paid to the taxpayer or for his benefit.

On the evidence, the Tribunal was satisfied that the amount in dispute was not assessable income of the taxpayer under s 97 of the ITAA 1936 for the relevant year of income. There was sufficient evidence to show that the sum (or some portion of the sum) was properly assessable to the taxpayer for the year of income, as trustee of another trust. The Tribunal noted that the payment of trust income into a bank account which might be controlled by a trustee where the account bears the same name as a particular beneficiary does not establish that the beneficiary is presently entitled. In this regard, the payment into the taxpayer’s account was made at a time when the HoCT/RST had no bank account in its name and it appeared to have been opened in the same name as the settlement cheque, for simplicity. Even though the taxpayer’s account was missing the suffix “as trustee for the RST”, in reality this is how it was treated in the various settlement documents. Moreover, it seemed clear that the funds in the account were treated as trust funds, with transactions into and out of the account recorded as such.